FEDERAL PRISON SYSTEM
ANNUAL FINANCIAL STATEMENT
FISCAL YEAR 1996
Audit Report 97-25A, (8/97)
TABLE OF CONTENTS
OFFICE OF THE INSPECTOR GENERAL COMMENTARY AND SUMMARY
INDEPENDENT AUDITORS' REPORT ON PRINCIPAL FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL
INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
COMBINED PRINCIPAL FINANCIAL STATEMENTS
COMBINED STATEMENT OF FINANCIAL POSITION
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION
NOTES TO THE FINANCIAL STATEMENTS
SUPPLEMENTAL FINANCIAL AND MANAGEMENT INFORMATION
COMBINING PRINCIPAL FINANCIAL STATEMENTS
SCHEDULE OF REVENUES AND FINANCING SOURCES
TREASURY SYMBOL MATRIX
APPENDIX I - AUDIT DIVISION ANALYSIS AND SUMMARY OF ACTIONS NECESSARY TO CLOSE THE REPORT
OFFICE OF THE INSPECTOR GENERAL
COMMENTARY AND SUMMARY
This audit report contains the Annual Financial Statement of the Federal Prison System (FPS) for the fiscal year ended September 30, 1996. The report includes FPS management's overview, the principal financial statements and related notes, supplemental financial and management information, and the Independent Auditors' reports on the principal financial statements, internal control, and compliance with laws and regulations. The annual financial statement is the responsibility of the FPS' management. This audit was performed as part of the Department of Justice's (DOJ) effort to implement the Government Management Reform Act of 1994 (GMRA) which requires an annual financial statement audit of the DOJ beginning with FY 1996. The results of the annual financial statement audit of the FPS as presented in this report will be relied upon by Price Waterhouse LLP in its performance of the consolidated financial statement audit of the DOJ, which will be issued in a separate report by the Office of the Inspector General (OIG).
The OIG contracted with Cotton & Company, Certified Public Accountants (CPA), to perform the FY 1996 audit of the FPS Combined Statement of Financial Position. Full scope audits will be performed in subsequent years. The audit was conducted in accordance with generally accepted government auditing standards and Office of Management and Budget Bulletin No. 93-06, "Audit Requirements for Federal Financial Statements." The OIG performs an oversight role in the audit process and ensures compliance with the GMRA by monitoring the progress of the audit, reviewing supporting workpapers, coordinating the issuance of reports, and following up on findings and management letter issues.
As part of the DOJ-wide audit effort, Price Waterhouse LLP performed a general controls review of the Justice Data Centers, which process FPS' data. The results of this work was considered by Cotton & Company in performing its audit of the FPS. Additional work was performed by Cotton & Company at the bureau level, as considered necessary to complete its audit.
The FPS is comprised of the appropriated activities of the Bureau of Prisons (BOP), Federal Prison Industries (FPI) and the Commissary Trust Fund (Commissary). BOP is charged with overseeing the operations of the prison system. Its mission is to protect society by confining offenders in controlled environments of prisons and community based facilities. FPI operates under the trade name UNICOR and is a wholly-owned, self-sustaining, government corporation manufacturing products for sale to federal agencies while providing employment and training to inmates in the prison system. The Commissary, also self-sustaining, provides inmates with access to products and services not provided by the BOP.
Federal prisons have been in existence since 1891 when Congress enacted legislation
authorizing the construction of three federal penitentiaries under the authority of the
Justice Department's Superintendent of Prisons and Prisoners. In 1930 the Bureau of
Prisons was established through Public Law 218-71 to oversee the federal prisons. In 1932,
Congress approved the operation of Commissaries within federal prisons. Finally, in 1934
the FPI was formulated as a component of FPS. Presently, FPS includes approximately
105,000 offenders confined in 86 Federal facilities and contract facilities throughout the
In FY 1996, FPS received $2.9 billion for its appropriated activities. The Salaries and Expense appropriation was $2.45 billion. The Building and Facilities appropriation was $357 million and $13.5 million was appropriated for Violent Crime Reduction Program (VCRP) activities. In addition, $152 million and $485 million in funds were generated through Commissary and FPI revolving fund activities, respectively.
The audit resulted in a disclaimer of opinion on the combined statement of Financial Position. The independent auditors were unable to substantiate a significant portion of real property because FPS did not maintain appropriate accounting records and relevant documentation beyond the 6 year federal records retention period. The independent auditors also determined that real property was not capitalized or depreciated properly and that Construction Work in Progress and Accounts Payable may be overstated. The independent auditors were unable to apply audit procedures sufficiently to determine the extent to which the combined statement of financial position may have been affected by these conditions. As a result, the scope of the Independent Auditors' work was not sufficient for the auditor to express an opinion.
The Independent Auditors' report on the internal control structure identified 4 material weaknesses with respect to: (1) incomplete real property capitalization, (2) incorrect depreciation calculations, (3) undelivered orders being recorded as accounts payable, and (4) unreconciled construction work in progress.
The accompanying report on compliance with laws and regulations reported a noncompliance issue relating to Federal Managers' Financial Integrity Act (FMFIA). The auditors compared the agency's most recent FMFIA reports with the evaluation they conducted of the FPS internal control structure and found that none of the weaknesses identified by the financial statement audit process were addressed in the FMFIA report.
The auditors were not contracted to perform control testing sufficient to enable them to express an opinion on management's assertions over the effectiveness of the internal control structure or compliance with laws and regulations. Accordingly they did not express such opinions. Additionally, certain conditions involving the internal control structure and its operation were noted by the auditors and will be communicated separately to management.
Financial and Other Operating Highlights
For FY 1996, FPS reported a combined excess of expenses over revenues and financing sources of $10 million. The FPI and the Commissary reported excess revenues over expenses totaling $34 million however, BOP experienced an excess of expenses over revenues of $44 million. The $44 million excess of expenses over revenues reported by BOP was primarily attributable to unfunded expenses of $43 million for actuarial and accrued annual leave liabilities. These liabilities cannot be liquidated without an appropriation enactment by Congress to pay for them.
The FPI's excess of revenues over expenses was $12.1 million which is primarily attributed to FPI exceeding its self imposed sales goal by $39.1 million. The Commissary also reported an excess of revenues over expenses of $22.3 million. The Commissary uses its excess revenues for expansion and improvements of facilities. Excess revenues are also accumulated for eventual distribution to institutions to fund inmate activities and purchase items that benefit the inmates.
The FPS performance goals include providing inmates with services and programs to address inmate needs. One accomplishment toward this goal is the BOP drug treatment program. Approximately 30 percent of the inmate population are drug abusers. During FY 1996, 12,828 inmates participated in the drug treatment program. Also, for the first time in FY 1996, FPS received an appropriation of $13.5 million from the VCRP to enhance the inmate drug treatment program.
Another performance goal of FPS is to maintain facilities in operationally sound conditions and in compliance with security, safety, and environmental requirements. In an effort to accomplish this goal, and reduce prison overcrowding BOP is continuously involved in construction and expansion. BOP activated 4 new institutions in FY 1996. Newly built institutions are located in Butner, North Carolina; Beaumont, Texas; Coleman, Florida; and Taft, California.